What’s the difference between secured and unsecured creditors in an Administration?

In brief

Secured creditors can be banks, other asset based lenders or private charge holders, including parent companies, directors or shareholders that have lent to the company.  Unsecured creditors can be suppliers, customers (for example if they have paid in advance), HMRC and subcontractors – they rank after secured and preferential creditors in an insolvency process.

In more detail

When a company goes into administration the appointed administrator will aim to rescue the company if they can. However, other than by exiting through a Company Voluntary Arrangement that outcome is very rare. Much more likely an administrator will realise assets and use the sale proceeds to pay secured, preferential and unsecured creditors.

Debts due to unsecured creditors are frozen at the date of the administrator’s appointment.  If the outcome of the administration is survival of the company and the business management assets are returned to the directors then the directors and staff of the company will pay unsecured creditors’ pre-appointment claims in full as the company continues to trade

If the company does not survive but sufficient funds are realised from the sale of the company’s business and assets to enable funds to be distributed to unsecured creditors the administrator may deal with their claims and pay them a dividend but only with the Court’s permission. Otherwise, after payment of the costs and expenses of the administration surplus funds will normally be passed to a liquidator to distribute to creditors – the administrator usually becomes the liquidator.

In specific circumstances the exit from administration will be a company voluntary arrangement (CVA) and the proposal approved by creditors will deal with the terms on which creditors are paid.

What next?

For more information about secured and unsecured creditors contact our team today who can give you the advice you need on 0800 254 5494